Worldwide PC Sales to Grow 10% in 2013 – so Let’s Look at Battered Shares of Dell and HP

by Dee GillJune 25, 2012

Shares of the two of the world’s biggest personal computer makers now sell for peanuts following collapses in valuation caused largely by the rise of iPads and smartphones. But if you believe you or your employer will buy at least one new PC before this era of technology ends, Dell (DELL) and Hewlett Packard (HPQ) both warrant some attention.

Both companies have all but given up on efforts to chase Apple (AAPL) into mobile devices, the area of technology that’s given other tech companies great gains. Both companies are still struggling to map out futures for themselves in this new gadget-oriented world, and their journeys have been ugly for all involved.

But both companies have a whole lot of cash that buys them time. Dell’s cash and short term equivalents amounts to more than 60% of its market cap. HP, with a market cap of $42.9 billion, has quite the stash too.

YCharts Pro gives both companies strong marks for fundamentals and considers HP’s share price excellent value. Dell shares get an average rating for value. But shares of both companies are unpopular now because of the real possibility that both are value traps; not great value investments. Each company needs success outside the PC market –- or phenomenal success within it -- to avoid irrelevance. Neither company is moving much toward those oh-so-profitable mobile products. Their strategies are still evolving.

Dell’s plans are a little like IBM’s (IBM) a decade ago when it moved away from inventing world-changing machines every day and became everybody’s IT department. Dell wants to sell fewer PCs to consumers and more servers, custom systems and, especially, services to corporations, like IP storage. The services in particular carry much higher profit margins. This hasn’t gone as well as expected so far. The company blames sales execution problems that it will fix and poor economic conditions that it can’t. But it’s very early days yet.

HP has been a mess of failed strategies and failed leadership for several years, but it’s begun to win back a little Wall Street respect since Meg Whitman took over as CEO in September. Its recent quarterly results impressed, although there was some shock over lower revenues from Autonomy. The software company hadn’t reported a sales decline in eight years before HP acquired it in 2011.

HP actually sold a lot of PCs first quarter. The company sees its future in state of the art PCs, laptops and workstations instead of chasing Apple’s iPads and smartphones. It’s also just launched a massive layoffs and restructuring program that’s supposed to cut billions from the operating expenses. The company did something very similar in 2010, yet here it is again.

Dell recently announced plans to start paying a regular dividend that will clock in first at a yield of about 2.7%. In the past, the company tried -- obviously unsuccessfully -- to provide shareholder returns through massive share repurchases. HP has long-paid a modest dividend that now yields 2.4%.

At the moment, neither company inspires a ton of confidence. Dell’s first steps to expand into a very competitive business aren’t encouraging. The Autonomy stumble at HP looked seemed like another sign that the company lacks deep management talent. PCs probably won’t ever be as sexy or profitable as mobile devices again. But industry forecasts call for worldwide PC sales to grow some 10% in 2013. Someone is still going to make money selling them.